“Ethical Dimensions of the Global Economic Crisis,”
Speech to the Canadian Centre For Ethics & Corporate Policy,
March 6, 2012 - Albany Club, Toronto
David Olive, business and current affairs columnist at the Toronto Star
Thank you for that kind introduction. And good afternoon, ladies and gentleman. I appreciate
the chance to share some thoughts with you today on our global economic difficulties. And
to do so in this almost hallowed setting, one of the oldest continuing political clubs in world,
founded by supporters of Sir John A. Macdonald.
Macdonald was worthy of the honour, as one of the greatest nation-builders of the 19th
century. But it’s Macdonald’s refusal to take himself too seriously that makes the story of his
life a delight. You will recall that Macdonald once came to the defence of his ally D’Arcy
McGee by asking a Tory gathering: “Now, gentlemen, what do you think of D’Arcy McGee? I
really think you will say: Not guilty. But he must not do it again.”
That lenience strikes me as analogous to the verdict on the latest Wall Street malefactors.
None of them have gone to jail. None have even been charged with wrongdoing. Instead
they have been gently let go with multimillion-dollar severance packages for the colossal
blunders that avarice led them into, with ourselves as collateral damage.
Then again, with our own Mark Carney, governor of the Bank of Canada, leading the way,
the world’s major economies are now scrambling to devise new means of preventing a
recurrence of the worst economic calamity since the Dirty Thirties. They must not do it
again, we’ve said. And it seems we’re content to leave it at that.
Too many business leaders do not recognize that business operates only by public sanction.
If you don’t believe me, read Conrad Black’s recent memoir. I’ve forgotten the title. But it
could have been called, The Difference Between God and Conrad Black: God Doesn’t Think
He’s Conrad Black.”
Business is and must be subordinate to the public good. This is not some vague principle.
The people are ultimately in charge. When business carves itself a larger share of the pie
than it deserves, when it operates in underhanded ways, it does so because we allow it to
do so. We choose not to bend business to the public good.
Generally speaking, only when business conduct gets out of hand, and much damage has
been inflicted, do we seek to rein in its excesses. If business understood that this is the end
game – that its rank misbehaviour will be met with awesome consequences for the
malefactors – it would not sink so often to anti-social behaviour.
I wanted to get that out of the way as a crucial starting point to any discussion of business
ethics in the context of the current Great Recession in the industrialized world.
If I had the wit of a Mark Twain I might say our predicament is akin to the frog whose pride
got the better of him as he attempted to devour a water buffalo. Like most economic
collapses since Biblical times, the particulars of this one are drearily familiar. It was
characterized by greed, gullibility, and quite staggering incompetence. As were the tulip
bubble, the Robber Barons, and the actors behind the great stock-market Crash of 1929.
Edna St. Vincent Millay had it right. She said, “It is not one damn thing after another. It’s the
same damn thing, over and over.”
In the 2000s, the most aggressive banks started trading high-risk derivatives and other
dubious assets. They made fantastic short-term profits from this trading. A derivative, as the
name suggests, is not a real asset but is a piece of paper derived from one. Often it is a bet
on someone else’s bet, which in turn might be a bet on something else again – as when
Goldman Sachs bet against securities it had just sold to its own clients. The leverage with
derivatives is spectacular, hence the appeal. With one dollar you can make a $1,000 bet.
Comparisons of the stock market with Las Vegas in matters of sound judgment are an insult
to Las Vegas.
Toward the end of the banks’ mid-2000s manic trading of derivatives, subprime or “junk”
mortgages, and other dubious investments, the CEO of Citigroup, then the world’s largest
bank, was asked if his trillion-dollar enterprise was still engaged in this dangerous activity,
with economic storm clouds on the horizon. And Charles Prince, in answering that question,
made one of the definitive comments of the most recent failure in free-market economics.
Mr. Prince said that, “As long as the music is playing, you’ve got to get up and dance. And
we’re still dancing.”
If growth for its own sake is the logic of the cancer cell, then “monkey see, monkey do” was
the driving spirit of the world’s leading financial capital in the 2000s.
Most of us left peer pressure behind in high school, and musical chairs earlier than that. But
for the world’s leading financiers, peer pressure is overpowering. Heaven forbid that other
banks report a dime more than you in quarterly earnings per share. So you copy your peers
in their reckless pursuit of short term gains. And you hope that the great reckoning will come
only after you have retired – most CEOs serve for only five years – and your inflated bonus,
tied to reported lofty profits, has been duly pocketed. At Nortel, CEO John Roth had safely
made his escape, a stock-option windfall of more than $120 million burning a hole in his
trousers, ahead of Nortel writing off Mr. Roth’s $34-billion of acquisitions as worthless and
the firm’s eventual bankruptcy. “It’s a sad story, what happened to Nortel,” Roth reflected
recently at his tree farm in Caledon. And we seem content to leave it at that – a legacy of
destroying more shareholder value and firing more employees than any Canadian firm in
history.
Canada’s Big Six banks for the most part resisted the global peer pressure. Ed Clark, the
CEO of Toronto Dominion Bank, went downstairs one day from his office in the TD Tower to
talk with his frenzied boys who were trading the collateralized debt obligations that Clark had
only learned the existence of that day. Clark did not know what a CDO was. After 15
minutes of grilling his traders on CDOs, and hearing only gibberish from them, it was clear
that they didn’t understand CDOs either. And Clark that day ordered that his bank to
immediately close out every CDO trade in the system and that TD never touch this exotic
instrument again.
Today, TD is one of the world’s most valuable banks as measured by shareholder value. By
contrast, Citigroup shares have lost 92% of their value. And Chuck Prince was fired, though
he did receive a parting gift of $42 million - “as a reward for breathing,” as Warren Buffett
would say. Citi has been bailed out by American taxpayers, and remains on government life
support. I swear, in the 2000s much of the financial industry was run by monkeys. Or
perhaps it was chihuahuas. I read once that a monkey held Gary Kasparov to a draw in a
chess match.
The cure for any frustration you might have in trying to fathom the epic financial meltdown is
to re-read Lewis Carroll’s Through the Looking Glass, to grasp the sheer absurdity of what
transpired. At one point in this crazy saga, the three banks of Iceland, whose population is
about half the size of Scarborough, Ont., had loans outstanding to borrowers worldwide far
in excess of Iceland’s entire GDP. Meaning that Iceland could not possibly rescue its three
insolvent banks even had it attempted to, which an enraged 300,000 Icelanders refused to
do. And quite properly so, in my view, since they had nothing to do with the secretive
machinations of those slick financiers. The Irish took the opposite approach, making good
on the obligations of their insolvent banking industry. And thus condemning the Irish to a
generation’s worth of precarious public finances.
As with most economic disasters, our vocabulary has expanded to absorb the terms by
which the latest mischief was conducted. And so we have heard more than we care to about
collateralized debt obligations, credit default swaps, and special purpose investment
vehicles, or SPIVs – which sound like something from the prop department of West Side
Story. SPIVs are the offshore cubbyholes where Bank of America, Merrill Lynch, Deutsche
Bank and others hid from regulators and investors their dubious mortgage loans to Florida
trailer-home buyers. You will recognize this device from its use by the now imprisoned Andy
Fastow when he was chief financial officer at Enron, may it rest in peace. Some bad ideas
are just too appealing to unscrupulous minds to ever go away.
I expect this latest failure of capitalism struck you as having the same hallmarks as previous
ones from the moment you first heard in late 2008 that Ben Bernanke, chairman of the U.S.
Federal Reserve Board, had just extracted an incredible $700 billion from Congress as a
downpayment on rescuing the global financial system. Bernanke had warned that if he didn’t
get the money, “We may not have an economy on Monday.” He was right. Those are the
stakes if you choose to run a zoo with the bars down. And I can assure you that the sleep of
not one of the reckless bankers – or “big swinging dicks,” as the vainglorious CEOs and
traders style themselves - was disturbed by the possibility of that grisly outcome.
The late Barbara Tuchman, one of the greatest historians, described war as the unfolding of
miscalculations. And so it is with economic failure.
In the 2000s, a so-called “shadow banking” industry rapidly evolved without regulators
knowing or caring. It came to account for some 40% of total U.S. financial assets, and is a
no-man’s land devoid of regulatory supervision. This shadow, or hidden, financial world
consists of hedge funds, private equity shops, and corporate buyout firms whose threat to
the system in a worst-case scenario can only be guessed at. That same opacity marked the
burgeoning market in derivatives, the size of which is a fantastic $500 trillion. In this
gargantuan shadow economy, no one has any idea where the money is or what it’s doing.
The epicentre of the disaster was the U.S. housing market, never properly understood as a
vast part of the North American economy because it is highly fragmented, unlike the dozen
or so firms that control the oil industry, for instance. We’re talking about tens of thousands of
unsupervised mortgage brokers peddling loans to 20-somethings with eyes bigger than their
stomachs, but convinced by an unscrupulous broker that they can afford to buy a $500,000
split-level in Phoenix, Orlando, Santa Monica or the affluent suburbs of southwestern
Michigan, where the excesses in bad mortgage lending were most pronounced. The
mortgage brokers were motivated by the lucrative up-front fees they pocketed from selling
the mortgages, never again to see the buyers, who in many cases were so-called “Ninjas.”
These are mortgagees with no income, no collateral, no downpayment, and no credit
history.
Those dubious mortgages, destined to be scorned as “toxic waste,” were then sold to
regional banks, which took their cut from selling them to the giant “money centre” banks in
New York. Wall Street, for its part, then packaged these junk mortgages into $250-million
“tranches” that were peddled, again for an upfront fee, to other banks, insurers, pension
funds and other financial institutions worldwide. So pervasive was this trading and so
widespread the gullibility of buyers that among those holding the bag in the end were the
Harvard Endowment fund and an obscure branch of the Ontario Ministry of the Treasury.
When the air suddenly began gushing out of the housing bubble in 2006, the world’s biggest
banks began to learn their hard lesson. Which was that the lucrative short-term fees that
boosted CEO bonuses were to eventually manifest themselves in staggering loan losses, as
rising interest rates in the mid-2000s caused monthly mortgage payments to skyrocket.
Millions of mortgagees could no longer manage their monthly payments, and either
defaulted or lost their homes through foreclosure. In contrast to Canada’s Big Six banks,
U.S. financial institutions had insufficient capital reserves for a rainy day to cover their
burgeoning loan losses and maintain their solvency.
Banks and other leading financial institutions worldwide are interconnected. The failure of
just two or three jumbo banks - Bank of America, say, or Deutsche Bank and J.P. Morgan
Chase – would imperil Sumitomo Bank, Barclays, the Toronto Dominion, National Australia
Bank and America’s more than 7,000 community banks. These banks collectively run the
international clearing system. If just two or three of the so-called “too big to fail” banks did
fail, with their overnight obligations to hundreds of other world banks that they suddenly
could not honour, those other banks would fail as well.
In that event, the flow of your direct-deposit paycheques would cease – in Chicago,
Singapore and here in Toronto. Your credit card would become a dumb piece of plastic. And
the power would go out at the ATM machines at Yorkdale and the Simon’s department store
in Quebec City’s tourist district. Yes, we would wake up Monday and there would be no
economy. And we came shockingly close to that outcome in the nail-biting months of late
2008 and early 2009.
What saved us from rogue capitalism, as before, was government. Central banks,
spearheaded initially by those of Canada, the U.S, Britain and Switzerland, rushed trillions of
dollars of liquidity into the system. That Mark Carney, newly arrived and youngest of the
world’s central bankers, was able to have Canada play such an outsized role in arresting the
global panic was due to the prudence of Canada’s Big Six banks. Carney was thus freed up
to help elsewhere.
Some people, many with distinct brogues that I’ve noticed, assert that Scottish values
employed in creating here in Canada the Western Hemisphere’s first branch-banking system
– the most stable form of banking – is what accounts for the world renown now enjoyed by
Canadian banks. Being only 1/16th Scottish blood myself, I can’t speak with authority on
haggis as a contributing factor in the robust health of our financial sector. But John Cleese,
while appreciative of the BBC’s taking a chance on “Monty Python,” has groused that “The
BBC’s official tartan is small cheques.” Thank heavens for people who are careful with
money.
I won’t dwell overly on the damage so swiftly inflicted by the greatest economic crisis
witnessed by most people alive today. Suffice to say that U.S. banks alone were hit with
$2.5 trillion in loan losses – a sum well in excess of Canada’s annual GDP. Then there’s the
more than $8 trillion lost by U.S. homeowners, investors and pensioners as home equity
evaporated and the stock market plunged 40%, the third-largest drop in history. An
estimated 30% of American homeowners are “underwater,” meaning that their mortgage
exceeds the value of their house. And so these millions of Americans have a negative net
worth. By the time this crisis is over, an estimated 8 million Americans will have lost their
homes through foreclosure.
The crisis killed an astonishing 165 U.S. financial institutions. Three of Wall Street’s Big Five
investment houses, including the world’s largest brokerage, Merrill Lynch, perished or had to
be forceably merged into stronger institutions. The other two, Goldman Sachs and Morgan
Stanley, hastily converted to bank status to enjoy the protection of the U.S. Federal
Reserve. Which means America’s investment banking sector has basically disappeared.
Royal Bank of Scotland, Britain’s largest lender and the second-largest in Europe, had to be
partially nationalized and placed on government life support, where it remains.
A sojourn in the government ICU has also been the fate of American International Group, or
AIG, the world’s largest insurer. In another absurdity, the London office of AIG alone held a
majority of the world’s credit default swaps. CDSs are basically hedges against potential
loss from a subprime mortgage or other risky investment. When the global banks’ loans
began to sour, the claims came pouring into the New York parent of AIG’s London
operation. Not imagining such a disaster possible, AIG had nothing like the capital reserves
required to honour its commitments.
AIG’s failure would have imperilled the worldwide banks and other institutions it was poised
to renege upon. And so U.S. taxpayers were made to rescue AIG. The tab so far has been
$180 billion. With $180 billion you could rebuild Detroit, New Orleans or Cleveland, which is
your answer to those who argue that business is a better allocator of capital than
government.
AIG is also an example, one of many in this sad tale, of a recurring lesson from the history of
business failure. Which is the ability of just one person – in this case the hyper-ambitious
boss of AIG’s London office in his manic salesmanship of CDSs – to bring about the
ruination of a venerable institution of mammoth size. When others speak of leverage they
mean debt, the ability to borrow $10 on just $1 in collateral. For me, leverage increasingly is
the ability of one person or a handful of people to imperil an entire institution, or a country, or
in this case the global economy.
More than 8 million Americans have lost their jobs in the Great Recession, and more than
400,000 Canadians were thrown out of work. These are people with no connection to the
financial industry. They were suddenly laid off because even the most prudential blue-chip
companies could no longer get credit to keep the lights on. So they began hoarding every
dime already in their treasuries, and scrapped every planned expenditure. Factory
expansions, new-product launches, research and development, cracking foreign markets,
marketing campaigns, all this industrial activity ground to a halt. Sad to say, this moribund
condition of the U.S. industrial sector still largely applies, four years after the housing bubble
burst and Wall Street imploded.
In past North American recessions, Canada and the U.S. have looked to consumers to lead
an economic recovery. But this time U.S. homeowners have lost an estimated $14 trillion in
home equity. They are now quite sensibly focused on rebuilding their savings. Business,
meanwhile, is too fearful of another credit crash to resume spending. Which leaves
governments, which alone have been able to pump stimulus funds into their economies.
North Americans also typically look to Europe, the world’s largest economy, for help in
distressed times in the form of increased export revenues. But Europe is now suffering the
aftershocks of a U.S. recession from which America itself is only gradually recovering.
Europe is now struggling with enormous public deficits from its own stimulus spending.
Which means all three economic supports – consumers, business and government – are
essentially tapped out. As a result, the average unemployment rate across Europe is now
20%, and the youth jobless rate is almost double that. Which is sobering, when you consider
that the Arab Spring that toppled no fewer than three entrenched regimes in North Africa last
year was spearheaded by chronically unemployed youth.
You might ask, since it is my topic, what has any of this to do with ethics? And my answer is
that it all does. Every party to this unseemly spectacle failed to do the right thing. That
includes the bonus-obsessed corporate CEOs and middle managers; the complacent
regulators; the government policymakers who repeatedly gave into corporate lobbyists’
demands for exemptions from prudent behaviour; and everyday Americans who chose not
to live within their means.
And not to leave out the credit-rating agencies, the oligopoly of Standard & Poor’s, Moody’s
and Fitch Ratings. They latched onto a growth strategy of rubber-stamping the increasing
volume of toxic waste as Triple A. Those agencies alone could have prevented the crisis.
Without their seal of approval, the Harvard Endowment Fund and thousands of money
managers worldwide would not have touched those toxic assets.
In one of the inevitable post-mortems, the U.S. Financial Crisis Inquiry Commission
concluded that the crisis was caused by “systemic breaches in accountability and ethics at
all levels.” And George Soros, the left-wing billionaire currency trader, called it “a shocking
abdication of responsibility.”
That comment by Mr. Soros assumes that the commanding heights of the economy are
occupied by people who are wired with a sense of responsibility. That they know and care
about the difference between right and wrong. And that they are guided by the Golden Rule.
None of which I’m prepared to credit them with. And neither are the most candid among
them.
There’s a Monty Python sketch in which the chief constable at the crime scene is informed
that, along with the other causes of the murder, society’s to blame. “Right,” the policeman
bellows, “we’ll be charging him too.” It is unfortunate that when everyone’s to blame, no one
is. That’s one reason no one’s going to jail.
But we have a precious opportunity here to rethink capitalism. Indeed, to examine it root and
branch. For instance, why have North Americans suffered three decades without a pay
raise, forcing them to max out their credit cards and borrow against their homes to make
ends meet? Why are corporate CEOs, who in 1980 were paid about 20 times’ the average
employee’s income, now paid about 400 times that average? Have they become 380 times
smarter? The evidence of the Wall Street meltdown, the bankruptcy of General Motors, and
the Deepwater Horizon explosion in the Gulf of Mexico would suggest, if anything, a
troubling deterioration in the sagacity of corporate CEOs.
With the candour that was typical of him, Sir John A. once allowed that “We are all mere
petty politicians at present. Perhaps, by and by, some of us will rise to the level of national
statesmen.”
I appreciate that hopeful sentiment. But I have to condemn its lack of fierce urgency. The
time for unimpeachable leadership is now, not by and by.
We have had our fill of private-sector disasters. They had been occurring at 10-year
intervals. But the disastrous dot-com and telecom bubbles and the coincident white-collar
accounting crime wave of Enron and WorldCom infamy were still unwinding in the early
2000s when the swarms of predatory mortgage brokers descended on California, Florida,
Arizona, Michigan and the other U.S. communities now infested with foreclosure signs. The
time lapse between catastrophic failures is shrinking.
Harsh austerity programs are now the rule across Europe. And a Republican-controlled U.S.
Congress has thwarted the president’s ability to continue with the emergency individual
assistance to fellow citizens that marked his first two years in office. That is the legacy of the
latest generation of business leaders.
They are pathetic in my eyes, these Harvard- and Wharton-credentialed captains of industry.
In failing so cravenly yet walking away with severance packages that run into the scores of
millions of dollars, I want to ask them, “Who gave you the right to do this?” To force a
budget-strapped Phoenix to lay off one-third of its police force? To make a debt-strapped
Britain lay off tens of thousands of teachers, nurses and other essential-services workers?
To push Greece into slashing the pension receipts of its fixed-income senior citizens?
But I have to turn that question on myself. As I earlier said, business operates by public
sanction. I’m thinking of Pogo, of course. The problem is us. We have permitted a chronic
leave from genuine leadership in our economic sector. It should be our mission – and this
has informed the Canadian Centre of Ethics since I had the honour of helping found it many
years ago – to highlight best practices by those businesses that choose to take the high
road. And to call out those whose behaviour is anti-social.
There are two ways of bringing this reform about. We can work within the system, as this
Centre does, and as the Occupy movement has done so far. We can hope our voices of
frustration with the anti-social conduct we work ceaselessly to prevent in our children will be
heard and acted upon by the powers that be.
Failing that, we can take to the streets as agitators for reform have done in Egypt, Libya,
Tunisia and now Syria. We can riot, as capitalism’s orphans have been doing in London,
Madrid, Athens and Oakland, California.
As we have seen so often, in historic and modern times, people will endure a great deal of
hardship arising from economic and other injustice. And then, with a terrible sudden fury,
they will overturn the existing order. It happened in Russia in 1917, and in Nazi Germany in
1932. And that has seldom been a pretty thing to witness.
So I encourage the Centre in its mandate of putting ethics at the core of business activity. I
wish you every continued success in your ambitious work.
And I thank you for the pleasure of sharing some thoughts with you today.